The Israeli woman who took on Starbucks – and won

Arcaffe introducd the Israeli customer to the high-end Italian coffee experience.Every business has a moment where it faces a major existential challenge: for Sara Shemer, owner of the upscale Arcaffe chain of Israeli espresso bars, that moment came in late 2001, when the international coffee giant Starbucks began opening its first outlets in Israel.

The competition to Shemer’s business couldn’t have been more direct – a global, world-famous chain opening its flagship branches precisely on the same blocks in central Israel as her carefully-chosen outlets of Arcaffe espresso bars.

Fast forward a couple years, and the winner in the caffeine battle: Arcaffe – in a knockout punch. Starbucks opened their first Israeli coffee shop, together with local corporate partners with plans to reach 20 outlets nationwide by the end of 2002. In the end, they wound up opening only six outlets. By April 2003, Starbucks had admitted defeat and closed up shop.

The official reason for the Starbucks retreat was the economic recession and security situation but industry analysts placed the blame for the business failure squarely on the tough competition it faced – largely from Shemer, along with two or three other chains. According to industry insiders Starbucks had arrogantly disregarded the competitive environment it was entering, underestimating how completely Shemer and her counterparts had won over a loyal clientele.

“It was a concept versus concept situation, and we were victorious. It was a tense situation to face: in which the flagship branch of the most famous chain in the world opens up across the street from you, but it was also a rare opportunity to truly test ourselves against an American giant and win,” said Shemer in a recent newspaper interview with Yediot Aharonot, her first interview in years.

Arcaffe’s road to victory was first paved nine years ago, when Shemer – with a background in advertising and marketing but no restaurant or coffeehouse experience – made it her mission to introduce the Israeli customer to the high-end Italian coffee experience.

During the years when Starbucks was busy expanding across the United States, Shemer opened her first outlet in Israel, a place where the average customer still didn’t know the difference between ‘cappuccino,’ ‘latte,’ or ‘macchiato.’ She was determined to aim high – including Arcaffe’s prices – in order to offer a “sophisticated gourmet experience.” She called her formula “the marketing concept of Starbucks married with the quality of Italian coffee.”

At the time, Israeli coffee shops were sit-down service affairs, usually neighborhood places, but with a few national chains – also oriented to table service. Israelis were used to three types of coffee – instant coffee, Turkish coffee and what is known locally as ‘café hafuch’ – a cappuccino/latte hybrid.

Arcaffe placed special emphasis on locating its outlets where the most affluent and influential populations had their offices: the company staked out the territory where the most businesses, law offices, and hi-tech companies operated, building a loyal customer base among those who were able to pay for the top of the line.

By the time Starbucks came around, the high-end business community customers, who were already hooked on Arcaffe’s quality coffee, freshly baked goods, and diverse menu – grilled sandwiches, lasagna, soup, and a range of desserts.

While most of the clientele were initially curious by the famous name and investigated what the American import had to offer – after they sampled the coffee, prefab sandwiches and pastries, they headed back to Arcaffe. The Starbucks strategy, which rested solely on the drawing power of its famous name, without examining closely what it was up against, failed utterly.

In its wake, Arcaffe is in expansion mode. There are currently nine Arcaffe outlets together with and five baked goods stands in shopping malls. Shemer has also opened a successful Italian restaurant – Gioa – next to her largest outlet in Herzliya which she is considering expanding into a chain and a large production facility in Netanya.

Shemer oversees every aspect of the business, together with her husband, who left his career the world of finance to join his wife’s enterprise.

Shemer is a notoriously detail-oriented person, involved in all aspects of the chains outlets down to the ingredients in the sandwiches and the manner in which the workers behind the counter address the clients. All of her instructions are compiled in the Arcaffe ‘bible’ which is required reading for employees.

She says that she does all she can to provide a “gourmet international experience” for her clients, an established older clientele, looking for excellent food, a relaxing atmosphere and a good place to do business. Instead of catering to a youth market, she counts on the fact that “our customers bring their kids here, and they will learn to appreciate what we have to offer.”

In its effort to stay cutting-edge, the Ramat Gan outlet has wireless internet service, one of the first coffee shops in Israel to do so.

She admits that running such a business in Israel at the moment presents unique challenges, and accepts that the cafes are often empty on the days following major terrorist attacks – but she says that the recently depressed economic situation has done less damage than feared.

Unlike upscale restaurants, going out for coffee is considered a relatively low-expenditure activity and “Israelis just don’t like to stay home.”

Shemer has ambitions to expand her concept abroad, including to the United States – where she has dreams of taking on Starbucks on their home turf of New York City and in Silicon Valley – but says she is waiting for the right partner at the right time. Like everything else about Arcaffe, she believes, expanding abroad isn’t worth doing unless it is done right.